Building the Plumbing for Institutional Capital Markets

“Don’t talk to me about blockchain or wallets, I just want to trade” is how LMAX Group’s David Mercer described the paradigm shift required to get more institutional investors trading digital assets.


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key takeaways

  • Institutional interest in digital assets is there, but there has to be more user-friendly infrastructure to get the next wave of institutions onboard
  • After all, institutional investors are where the money is. LMAX Group’s 500 customers do nearly as much volume as Coinbase’s 2.8 million active users

More and more institutions have gotten onboard with digital assets, but while early adopters have blazed a trail in order to get the next wave of investors on board trading crypto needs to look like any other commodity panelists on a recent Blockworks webinar said.

In order to widen market access for institutions there needs to be better credit intermediation, David Mercer, the CEO of LMAX Group, which operates an institutionally-focused digital assets exchange, LMAX Digital, said during the session. Mercer laid out the ‘A,B,C’ of crypto, or, Access, Banking, Credit, which are the key factors institutions — as well as retail investors — consider when deploying capital to crypto. 

“There’s a lot of plumbing in capital markets. And the plumbing either is non-existent in crypto or it’s blocked,” Mercer said. “We’re going to need that B and C in the A-B-C to come into the market.”

Without these key pieces of infrastructure like banks and clearing houses, which are part and parcel of any other type of securities or commodities market, trading digital assets looks foreign and intimidating to many. Mercer gave an anecdote from one of his clients that wanted to dive into digital assets but was skeptical due to the learning curve involved. 

“About three weeks ago a client said to me, ‘David, don’t talk to me about blockchain’. Don’t talk to me about wallets. Don’t talk to me about security and keys. I don’t care,” he said. “So, we’re going to need better credit intermediation for that.”  

Of course there are plenty of institutions, like well known car companies and other funds, that have no problem acquiring their own digital assets and dealing with custody. They have the team in-house to deal with it. 

“But there’s a lot of them that just want to follow their existing plumbing, their existing credit network. They don’t want to open up another credit relationship,” Mercer said. “These banks and credit intermediaries will have to come in and [start onboarding digital assets].”

Because, according to Mercer, if you go to Wall Street right now and ask any private banker they will tell you that their customers are taking money out to trade on a crypto exchange or buy a crypto asset. 

“They’ll want to provide that service to those clients. They own those clients today. If they don’t service those clients they might lose them forever,” he continued. “And they don’t want to do that because those relationships are valuable to them in equities, wealth management products, mortgages etcetera.”

All this isn’t to say that there’s not an interest. Mercer said that in 2017 he knocked on the doors of 34 banks to try and get them onboarded. At the time, they all said ‘Not now, David’, but this year alone 11 of the 34 are now taking market data, three are fully onboarded.

And what will it take to get the remaining 31 of the 34 onboarded?

Again, plumbing.  

“Not only is there no plumbing that connects to the legacy financial system,” Michael Sonnenshein, the CEO of Grayscale Investments, said “But the pipes aren’t even pointed in the right direction.”

But Sonnenshein reminds us that it’s still early. And there’s a lot of work to do in order to get these pipes connected and the remaining 31 of Mercer’s prospective clients onboarded.

But this work is being done, and an ecosystem of tools is being developed, some of which Sonnenshen’s Grayscale is working on. 

“It’s still early. We are excited to see this connectivity happen. It will draw in a lot more capital into the asset class, and it will draw in the incremental user and adopter of this ecosystem and asset class,” he said. 

And all of this matters because LMAX Group traded 75 billion in crypto in May with just 500 customers. Imagine if it had 5,000.


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